Meanwhile, most of the press has not been interested in the least in even the most notorious business dealings of prominent Democrats. Former Clinton Treasury secretary Robert Rubin's acknowledgement that he telephoned Treasury Department officials on behalf of Citigroup Inc. to try to get them to keep credit-rating agencies from downgrading Enron hasn't undermined the media's confidence in him when he bashes Republicans or calls for repealing last year's tax cuts.
As the Media Research Center points out, a Newsweek article by Jonathan Alter even complained that Bush "lacks an oracular Robert Rubin figure to calm the markets," and then goes on to quote the oracle's call to "adjust" the tax cuts downward. Not a bad idea to make money more precious, say critics, when you are in the business of lending it.
Hovering above all this is the case of Sen. Jon Corzine (D-N.J.). Mounting evidence has come to light that during Corzine's reign as cochairman of Goldman Sachs — a rich and prestigious investment-banking house also formerly cochaired by Rubin — the firm may have manipulated the market and inflated stock prices through a controversial practice now being investigated by the Securities and Exchange Commission (SEC). Corzine, a sponsor of several bills to "protect" investors by adding more layers of regulation, has been portrayed by the Democratic leadership and by the liberal press as a benevolent millionaire championing the cause of the little guy.
After playing defense in the seven months since Enron went bankrupt, some Republicans finally are calling for Democrats of the go-go Clinton era to be held accountable for their roles in corporate scandals. "When we talk about Enron, we ought to talk about all the players," declared Rep. Mark Foley (R-Fla.) on the House floor. Foley also wrote to the nightly news anchors of the Big Three TV networks urging them to cover the corporate and political relationships of Corzine and Rubin.
Foley is one of many putting the heat on Democratic Sens. Joe Lieberman of Connecticut, chairman of the Senate Governmental Affairs Committee, and Carl Levin of Michigan, chairman of that committee's permanent subcommittee on Investigations. The pair seems to be subpoenaing every Bush aide with a possible tie to the Houston-based energy company while saying they will not call Rubin. In late July, Lieberman backed off somewhat and said he would call Rubin if he believed the former Treasury secretary had pertinent information.
Rubin preceded Corzine as a cochairman of Goldman Sachs in the early 1990s, before he came to Washington to work for Clinton, for whom he had scoured corporate boardrooms to raise very large sums of money. Like Rubin, many of the firm's current and former executives are big-time Democratic donors. Corzine used $65 million of his own money, two-thirds of his fortune made at Goldman, to mount, or some say buy, a successful Senate campaign in 2000.
These days, as Newsmax.com has put it, Corzine is "one of the loudest Democrats trying to blame others for corporate corruption." Portraying himself as a progressive corporate reformer, the business moralist declared in a press release in January: "Our markets work when they're predicated on information that is truthful and accurate."
The problem is, Goldman Sachs under Corzine and Rubin may have been one of the leading firms deceiving investors about the real value of the stocks of new companies, critics say. "If we're going to have hearings, Mr. Lieberman, let's have Goldman Sachs … brought to the dais," Foley says. "There seems to be some real mischief. Goldman Sachs was hyping Enron past $90. They encouraged people to buy it" when they had reason to know better.
Allegations have surfaced that while Corzine was cochairman of Goldman Sachs from 1994 to 1999, the firm engaged in a deceptive and possibly illegal practice called "laddering" in which it would give brokerage firms shares of an initial public offering (IPO) at very low prices in exchange for a commitment to buy some shares at a higher price once it opened on the market. Nicholas Maier, syndicate manager for the brokerage firm Cramer and Co. from 1996 to 1998, wrote about laddering in his powerful book Trading With the Enemy. "Goldman Sachs was one of the chief perpetrators of an illegal act that was the original sin of the Internet bubble," Maier tells Insight.
As Maier describes it on the Dotcom Scoop Website, "I would get my 5,000 shares of an IPO [from Goldman] at 20, agree to buy more at 100, and over the next day or two sell it all with another broker. Remember, none of these aftermarket orders had anything to do with what I honestly valued a company to be worth. I only bought more because of the direct kickback."
Maier says it was this practice, more than others commonly cited such as the overuse of stock options, that fueled the stock-market frenzy. Seeing the high stock prices and thinking the demand was real, average investors would buy in and be left holding the bag. "It turned all these stocks, which have proven to be losers, into instant winners" long enough for the insiders to rake in millions, Maier says. "The little guy at home had no idea these stocks had been artificially manipulated, and they bought. Whereas people in the know, such as Cramer and Co., were selling as fast as possible."
Responding to Maier's allegations, Corzine told the Washington Times: "I don't believe there is ever going to be anything that sticks about us at Goldman Sachs forcing anybody to buy anything. Goldman Sachs never forced anyone to buy anything when I was chairman." Maier replies to Insight: "He's either lying or he's very stupid. For a CEO [chief executive officer] not to know what an investment-banking division is doing as a common practice, he would have to claim total stupidity or that he lied."
Corzine's office did not get back to Insight to respond to Maier's specific charges. However, his spokesman, Darius Goore, claims that Maier's book was "erroneous" and had been recalled by the publisher. He sent Insight a Business Week Online story about the controversy. In fact the Business Week Online story notes that the book's publisher, Harper Collins, reissued the book and replaced only one page from it. Maier says the only error had nothing to do with the laddering allegation, but was a misidentification of a company involved with another issue. Also Maier says that, despite his repeated assertions that Goldman Sachs was the worst perpetrator, the firm has never so much as threatened him with a lawsuit regarding his laddering claim.
Goldman Sachs did not respond to Insight's request for comment on these and other allegations.
Certainly Maier isn't the only savvy Wall Streeter making these allegations. Mel Weiss, a prominent plaintiff's attorney who is a partner at Milberg, Weiss, Bershad, Hynes and Lerach, is suing Goldman Sachs and other investment banks on behalf of investors in companies underwritten by firms that have been driven into bankruptcy. Weiss says shareholders were deceived because the laddering practices never were disclosed to them as a possible reason the share prices were selling so high.
Weiss does not allege that Goldman Sachs was the ringleader of the laddering, as Maier contends, but he tells Insight the company was "one of the top 10 [firms] that we've named." Weiss also says Goldman Sachs was the lead underwriter in 50 of the 200 ladder lawsuits his firm has brought and a player in many others.
Maier says he has spoken to the SEC about Goldman Sachs' actions. SEC spokesman John Nestor tells Insight, "I cannot confirm or deny whether there is an investigation." Asked directly if the laddering scheme is illegal, Nestor points to a legal bulletin from the agency's Division of Market Regulation in August 2000 stating that "underwriters … are prohibited from … requiring their customers to make aftermarket purchases."
Some on Wall Street are saying Goldman Sachs as a firm has escaped scrutiny because of its ties to big-time Democrats Corzine and Rubin, and the perception it cultivates of itself as a "progressive" firm. "They have a tendency to hire people who are politically connected, and you can infer from this that they're planning on using their connections," Alan Reynolds, a senior fellow at the libertarian Cato Institute, tells Insight. The press recently oohed and aahed when Henry Paulson, Goldman's current CEO, spoke at the National Press Club in support of new regulations touted by Democrats. But Reynolds sees this speech as an effort to take the spotlight off of Goldman Sachs' problems.
Reynolds notes that while Merrill Lynch has received considerable attention for allegedly praising companies that its analysts privately disparaged in e-mails, it actually has a better track record than Goldman Sachs in its stock advice. In a recent Wall Street Journal survey, Merrill Lynch was ranked second among Wall Street firms on the accuracy of advice about which stocks to buy. Goldman Sachs, by contrast, finished near the bottom at 14th.
And Goldman Sachs analysts appear to have praised Enron more and stuck by it longer than any other financial firm in the United States. David Fleischer, a managing director at Goldman Sachs, told the Wall Street Transcript in February 2001 that "Enron is the most incredible growth machine there is." Fleischer went on with lavish praise. "I believe it should be compared with the best companies in the economy. I compare it to Home Depot, Microsoft, Pfizer and General Electric," he said. He then bashed other analysts whom he said were underestimating Enron's growth potential. "It amazes me that the … First Call growth numbers are still around 15 percent. I think we're the only firm looking for 25 percent earnings growth long term at Enron — more than five years, maybe even eight or nine years," he said.
Less than one year after Fleischer made those statements, Enron went bankrupt.
Even in October 2001, after Enron announced it was stating its earnings to reflect a $618 million quarterly loss, a Goldman Sachs report called Enron "still the best of the best." Showering the company with praise, the report stated, "We view the current period as an extremely rare opportunity to purchase the shares of a company that remains extremely well positioned to grow at a substantial rate."
Goldman Sachs is one of many firms being sued by investors who lost their life savings in Enron. The lawsuits may not go anywhere. Analysts aren't perfect, and many claim Enron duped them. But Goldman Sachs may have had other reasons for its extremely positive outlook on the prospects of the energy giant, critics say. It did substantial business with the company. According to its 1999 annual report, "Goldman Sachs was bookrunning manager for [Enron subsidiary] EOG Resources and Enron Corporation of a public offering of common stock and exchangeable notes, respectively totaling more than $1 billion. This represented the largest equity financing by a U.S. independent oil and gas exploration and production company."
While nothing yet has surfaced as clear evidence of fraud with regard to Enron at Goldman Sachs under Rubin and Corzine, it is a closer call for Citigroup, which now employs Goldman and Clinton alum Rubin. The New York Times has reported that Citigroup, where Rubin now is chairman of the executive committee, allegedly disguised loans it made to Enron as "commodity prepayments" to boost company earnings and keep shareholders from losing confidence. Citigroup reportedly was Enron's largest lender, and Rubin's phone calls could be "the real smoking gun in the Enron scandal," Foley says.
In addition to the call Rubin made to Treasury Undersecretary Peter Fisher asking him to persuade the credit-rating agencies not to lower Enron's rating, a managing director of the Moody's rating agency has come forward to say Rubin contacted him to try to stop the downgrade as well.
A Citigroup spokeswoman says the former treasury secretary was only exploring the option of getting the rating agencies "to consider delaying their downgrade. This would allow the banks a little more time to put in additional money and potentially stave off the bankruptcy." The spokeswoman claims Rubin had no knowledge of the commodity-prepayment transactions currently in dispute.
Some who have followed Rubin's career say his apparent effort to use his political contacts to "fix" the Enron crisis bear a striking resemblance to his actions while at Goldman Sachs in the eighties when one of his employees, Robert Freeman, was indicted in an insider-trading scandal. According to the book Den of Thieves, by Pulitzer Prize-winning Wall Street Journal reporter James B. Stewart, Rubin led the firm's stonewalling of the investigation of then-U.S. Attorney Rudy Giuliani. "Rubin was furious at Giuliani's public humiliation of Freeman and Goldman Sachs," Stewart wrote. "As a Democratic fund-raiser, Rubin didn't intend to allow the Republican Giuliani to gain politically at the expense of Goldman Sachs."
Stewart wrote that the firm's internal investigation of Freeman, led by Rubin, "showed more interest in finding plausible alternative excuses for the trading in question rather than in determining whether [Freeman had actually received insider information]." Stewart reported that when Freeman finally pleaded guilty to one count of insider trading, Goldman Sachs issued a statement "attack[ing] the prosecutors rather than a partner who had just admitted a felony."
Meanwhile, Goldman Sachs alum Corzine has become the point man for the Democrats in attacking Bush's plan for private Social Security retirement accounts, arguing that the current corporate scandals show the stock market is just too risky. "Privatization would take the security out of Social Security," Corzine said in a July press release. "If that wasn't clear before the current downturn, it should be now." Maier countered that what's really clear is that, for retirement savings to be secure, Corzine and his old firm must be held just as accountable as everyone else for their role in the current financial scandals.